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Should I overpay my mortgage?

More homeowners are now considering increasing their monthly payments so that they can pay off their mortgage sooner.

Indeed, getting it right and making mortgage overpayments can work very well because – you can pay off your mortgage account quicker and be out of debt quicker.

You won’t be paying mortgage interest on the overpayment.

This means that it can often outweigh the amount of money you would get from a savings interest account, which is currently rather pitiful.

If you overpay on your mortgage, then it is effectively the same as saving at your current mortgage rate.

So, if there’s a 0.15% on your savings account but you have a 2% mortgage rate, you would benefit more by overpaying your mortgage.

An example is as follows:

Person A started overpaying their mortgage five years ago. They saved £15,000 in interest and paid their mortgage six years early. Now, Person A is putting what would have been a mortgage repayment into a retirement pot.

Overpaying your mortgage options to consider

However, before you start adding extra to your mortgage payment online account, you need to look at the following:

1. Penalties

Does your mortgage provider allow you to overpay without a penalty? Many allow you to overpay by around 10% per annum but if you get it wrong, it could cost you thousands of pounds in fees.

Fees for paying extra on your mortgage balance can be as much as 5%. So, if you have a £100,000 mortgage and overpay 15% instead of 10% (£15,000 instead of £10,000 allowed) you might be fined a 5% penalty on the additional 5% overpayment… £250. So, make sure you check the mortgage deal small print first.

2. Pay off more expensive loans first

You need to pay off your more expensive loans and debts first. This will mean you won’t be paying as much interest overall. In the long run, this will save you money and allow you to pay off debts earlier.

So, clear your high-interest credit cards as a top priority. You should also clear any unsecured loans or pay off your student loan debts as well if you have them.

3. Don’t deplete your emergency fund

It is important to have spare money for emergencies. If you overpay with all of your savings – including your emergency money then you leave yourself vulnerable. If you have an emergency – like a broken boiler or broken down car, and you have nothing to pay with, then you may be forced to borrow again – but from a higher rate. So, always keep an emergency supply of money before paying off your mortgage.

There are flexible mortgage deal options that allow you to overpay and borrow the money back if necessary. If this is the case, you can afford to overpay with your emergency funds with lesser risk – as you can get back some of the spare cash without paying higher interest rates – almost like treating your mortgage like savings accounts!

4. Check the best available interest rates

You may not have a great interest rate, but that doesn’t mean that you should automatically opt for mortgage overpayments.

First, check to see if you can get a better interest rate first – one that could offset mortgage payments.

You might find ISAs and top savings accounts that can be even better than paying off your mortgage balance.

What wins – Paying off mortgage debt or saving?

Most people looking to make a lump sum overpayment will otherwise be mortgage-free, already have an emergency fund and have researched the best saving rates out there. They will also likely have a mortgage that allows some degree of penalty-free mortgage overpayments.

But, you now need to work out whether it is best to start saving money or putting extra money into your monthly mortgage payment. This is the most important decision you need to make – and whatever you do depends on what makes sense financially for you.

The basic rules are:

  • If you can find better savings rates than your mortgage rates, then saving your money is better.
  • However, if your mortgage rate is higher than any savings rates you can find, then overpaying on your mortgage wins.

e.g. You have a £20,000 mortgage debt at 1.89%. That means your annual interest rate is £378. If you have £20,000 in savings with a rate of 0.4% then the annual interest is £80.

So, if you pay off some of your mortgage with the £20,000 lump sum then you will be £298 per year better off.

How to overpay your mortgage?

If you have looked through all of the figures and can afford to exceed your required monthly repayments, then you will want to understand how you can go about overpaying your monthly payments.

If this is the first time and you need more help, then we would always recommend giving your mortgage provider a call. This way there are no doubts and you can check everything out.

You can find out how much you are allowed to overpay and also make sure that any of your overpayments will be used the correct way.

When you contact your provider to start making your overpayments, a mortgage lender may give you two options.

  1. You can either make your mortgage more flexible – by lowering monthly payments in other months by the amount you have overpaid (for example, over Christmas etc) or;
  2. You can also look to reduce the mortgage term instead and keep your payments the same.

You need to make sure you make the right decision. If you make the wrong choice then overpaying your mortgage balance won’t actually be very helpful at all.

If they do offer you this choice, you need to be clear with your mortgage lender that you are overpaying your mortgage to reduce the length of your mortgage.

If you don’t make it clear, and your overpayment simply goes on to lower your following month’s payment, then all it means is that you save just a little interest, but not a great deal – and that you won’t really get much benefit.

You would still have to repay practically as much as if you had just paid what you were contractually obliged – and you won’t even shorten the mortgage term.

So, before you start overpaying your mortgage, you need to make it completely clear to the lender that you want any future overpayments you make to go towards reducing the term of your mortgage.

As soon as this is agreed upon, you can generally start paying off extra money via your online bank system and setting your mortgage account up as a new payee.

You can then start making extra payments whenever you want.

If you have a steady income stream, then you may consider setting up a standing order to your mortgage account and paying off a set amount every month.

Overpaying your mortgage FAQs

Can I overpay an offset mortgage?

Yes, normally you can overpay an offset mortgage. However, because you are already sort of over-paying, you need to think about it. Having an offset mortgage keeps your savings and mortgage debts in different pots but with the same provider – but your cash savings are used by your provider or offset your mortgage and reduce the interest charged. I.e. if you have a mortgage of £120,000 and have £10,000 in savings then you will only pay interest on £110,000 of your mortgage.

Does it matter when I overpay?

Not really – most mortgage lenders nowadays calculate interest rates daily. However, if you have a mortgage over 10 years then it might be calculated monthly, quarterly or even annually, so check first, or it might not make a difference for quite some time. The less frequently they calculate, the more important it is to plan your timings.
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